Fiduciary standard makes advisors more objective

Fiduciary standard makes advisors more objective

Fiduciary standard makes advisors more objective As CRM2 is making waves among Canadian financial advisors, an SEC-imposed fiduciary rule is shaking up retirement brokers in the US. The rule, which goes into effect in April next year, will require US financial advisors to put their clients’ best interests first – a stricter standard than that of “suitability,” which only compels advice in line with clients’ interests.

According to Financial Advisor IQ, the practical difference between these two standards was examined in a study conducted by MIT professor of entrepreneurial science Antoinette Schoar, along with Sendhil Mullainathan at Harvard University and Markus Noeth at Hamburg University, which was published in the Wall Street Journal.

In the study, Boston-based financial advisors were approached by mystery shoppers pretending to be retirement savers who were hoping to roll over their 401(k) plans. The shoppers displayed biases and misconceptions about markets which, according to Schoar, most of the advisors didn’t correct.

Advisors also tended to exaggerate misconceptions that allowed them to sell more expensive products. Furthermore, only 7.5% of the advisors in the study encouraged the “clients” to opt for low-cost index funds rather than actively managed funds that, according to financial research, are less ideal for average investors because of their higher fees.

Advisors who adopted the fiduciary standard, however, provided less biased advice than those working under the suitability standard. According to Schoar, they “were less likely to move people away from index funds and to reinforce erroneous beliefs about the market.”

A fiduciary standard would also make the market’s competitive forces benefit consumers rather than hurt them; the more poorly informed retail investors are, Schoar argued, the harder it would be for those who provided sound financial advice to compete against biased, pie-in-the-sky recommendations.

“So holding financial advisers to higher fiduciary standards is not only good consumer financial protection but is also good market economics,” she concluded.

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